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REITs to Watch for Q4 Earnings on Feb 9: WELL, PEAK & UDR

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Devyani Chamria
·7 min read
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REIT’s fourth-quarter results are likely to reflect the impacts of occupancy losses across seniors housing communities amid a spike in COVID-19 cases in the quarter, while urban exodus is likely to have hindered the residential REIT performance.

Understandably, underlying asset categories as well as the location of properties have played a crucial role in determining REITs’ performance, especially amid the pandemic-led setbacks. As such, delving into the asset fundamentals and markets of each REIT becomes all the more important.

Q4 Projections

NIC-MAP released fourth-quarter 2020 seniors housing data, which indicates that seniors housing occupancy in the December-end quarter declined 130 basis points (bps) sequentially to 80.7%. Occupancy losses also resulted in the worsening of net absorption. In fact, net absorption was -5.4% in the fourth quarter compared with -3.8% in third-quarter 2020. Moreover, annual rent growth decelerated to 1.4% in the quarter under review as compared to 1.7% in third-quarter 2020.

As for residential real estate, the U.S. apartment market witnessed solid leasing activity in the fourth quarter of 2020, per a report from the real estate technology and analytics firm RealPage RP. Typically, demand remains low during the October-December quarter but the pandemic pushed the demand to the latter half of the year from the usually strong second quarter. Particularly, in the last three months of 2020, absorptions amounted to about 79,000 units.

However, the demand rebound has not been even, rather, it has been varied across markets. The demand in the Sun Belt markets and the sub-urban ones remained strong, while considerable move-outs and sluggish demand were noticed in the gateway markets.

Also, rent changes varied across metros, with select big cities witnessing significant price reductions, while in a number of individual metros, rents continue to rise or have been steady, per a report from RealPage. As of December 2020, effective asking rents on a nation-wide basis were off 1% from the 2019-end figure, with the December price point coming at $1,410 per month.

Let’s see what’s in the offing for three REITs, which are scheduled to report fourth-quarter earnings tomorrow.

Welltower, Inc. WELL: The company is expected to have continued to bear the brunt of occupancy pressure and rent growth deceleration in the quarter.In fact, it noted an approximately 220-bps sequential occupancy loss at its seniors housing operating (“SHO”) portfolio in the quarter under review from 78.4% to 76.2%. The surge in COVID-19 cases in the second half of fourth-quarter 2020, the seasonal slowdown in move-in activity and unfavorable trends in move-outs are anticipated to have caused such occupancy losses.

Such occupancy declines combined with significant fixed costs are expected to have led to further margin erosions. Also, Welltower has been actively selling assets, with pro-rata dispositions in the fourth quarter and 2020 aggregating $674 million and $3.7 billion, respectively.Revenues lost from such sales, the dilution in earnings and a reduction in cash flows are likely to have affected fourth-quarter and 2020 performance.

Prior to the earnings release, the Zacks Consensus Estimate for quarterly funds from operations (FFO) per share has been revised marginally downward to 77 cents over the past month, indicating bearish sentiments of analysts. Moreover, it indicates a decline of 26.7% from the year-earlier reported figure. (Read more:Seniors Housing Segment to Ail Welltower's Q4 Earnings)

Our proven model does not conclusively predict a beat in terms of FFO per share for Welltower this reporting cycle. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a positive FFO surprise. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Welltower currently has a Zacks Rank #4 (Sell) and an Earnings ESP of -1.51%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

The following chart shows the company’s surprise history over the past four quarters.

Welltower Inc. Price and EPS Surprise

Welltower Inc. Price and EPS Surprise
Welltower Inc. Price and EPS Surprise

Welltower Inc. price-eps-surprise | Welltower Inc. Quote

Healthpeak Properties, Inc.PEAK: Like Welltower, Healthpeak too is not immune to the senior housing woes that have strained healthcare REITs’ performances over the past several quarters. Healthpeak expects total stabilized senior housing operating portfolio (“SHOP”) occupancy to fall 100-200 bps in the quarter under review, while COVID-related SHOP expenses are projected to be $5 million.

These are expected to strain SHOP net operating income, which is estimated to be $170 million. The figure indicates a sequential decline of 1.7%.

Nonetheless, Healthpeak has the majority of its investments in life science and medical office assets and these segments are anticipated to have curtailed the massive shock of the senior housing segment and aided top-line growth.

The life-science segment is expected to have witnessed decent growth in the to-be-reported quarter amid the increasing need for effective diagnostics, therapies and vaccines to fight the coronavirus pandemic. Moreover, with a recovery in patient volumes, the medical office segment is likely to have witnessed high leasing and tenant retention. (Read more: Is a Beat in Store for Healthpeak in Q4 Earnings?)

The Zacks Consensus Estimate for quarterly FFO per share has been unchanged at 40 cents over the past month. It also suggests a 9.1% year-over-year decline.

The chances of Healthpeak delivering an earnings beat in the to-be-reported quarter are high as it has a Zacks Rank #3 and an Earnings ESP of +5.66% at present.

The following chart shows the company’s surprise history over the past four quarters.

Healthpeak Properties, Inc. Price and EPS Surprise

Healthpeak Properties, Inc. Price and EPS Surprise
Healthpeak Properties, Inc. Price and EPS Surprise

Healthpeak Properties, Inc. price-eps-surprise | Healthpeak Properties, Inc. Quote

UDR Inc. UDR: Amid renters gravitating toward less-populated and low-cost suburban regions, UDR’s geographically-diverse portfolio, with a superior product-mix of A/B quality properties in urban and sub-urban markets, has been a saving grace for the company.

The strategy of maintaining a diversified portfolio is likely to have provided support in generating operating cash flows in the quarter under review.Moreover, on its November investor presentation, the company pointed out that October and November cash collection rates remained consistent with the prior months at similar times of the collection cycle, and only around 500 residents (<1%) are delinquent and without payment plans.

However, there have been regulatory restrictions, flexible work schedules, and varying paces of state/city re-openings in urban locations, which are expected to have affected the company’s performance.In addition, amid record-low mortgage rates, homeownership rates have started to shoot up. Furthermore, the use of concessions has been rampant in urban portfolios, which is likely to have dented UDR’s performance in the quarter under review. (Read more: UDR to Report Q4 Earnings: What's in Store for the Stock?)

The Zacks Consensus Estimate for the FFO per share has been unchanged at 49 cents over the past month. Also, it suggests a year-over-year decline of 9.3%.

The chances of UDR delivering an earnings beat in the to-be-reported quarter are low as it has a Zacks Rank #4 and an Earnings ESP of +0.68% at present.

The following chart indicates the company’s surprise history over the past four quarters.

United Dominion Realty Trust, Inc. Price and EPS Surprise

United Dominion Realty Trust, Inc. Price and EPS Surprise
United Dominion Realty Trust, Inc. Price and EPS Surprise

United Dominion Realty Trust, Inc. price-eps-surprise | United Dominion Realty Trust, Inc. Quote

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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